For Ford, Small Cars Mean Smaller Profit

Like many car companies, Ford makes bigger profits on large trucks than on small cars.

Ford Motor Co.’s stock is getting run over today, as investors worry that the auto maker’s profit growth will plateau this year in part because of what CFO Bob Shanks referred to as “adverse product mix.”

That phrase is a car business euphemism for a condition in which an auto maker sells more low-profit cars and small sport utility wagons, and fewer of its larger, more expensive models. When a Detroit company like Ford complains about “adverse mix,” what it means is the company expects big pickup trucks to account for a smaller share of total sales.

It’s true that Ford has built its turnaround — and the impressive 10% margins its North American auto business achieved in 2012 — by boosting the profitability and desirability of its smaller vehicles. The new Fusion midsize sedan, the Ford Focus compact and the Ford Escape compact SUV are all big improvements over their predecessors.

But selling more of these vehicles — and hybrids like the Ford C-Max — can hurt overall profit margins, Mr. Shanks warned during a conference call this morning.

“We are going to have a lot more Fusions, Escapes and C-Maxes,” he said. “Obviously the margin we see on these vehicles isn’t as high as it is on the F-series.”

Auto analysts have pegged the variable margin on each Ford F-series truck at between $8,000 and $10,000. Compare that to $2,500 in pretax profit in North America per vehicle sold and it is easy to see that the trucks contribute an outsized share of Ford’s overall profitability.

Comments (1 of 1)

Well they basically surrendered the high margin luxury car market. Lincoln is years away from being a contender again. You may like some of their upcoming offerings but years of neglect won't go away easily. The public perception of lincoln is going to be the hardest thing to change.